The Frustrating Gap between Strategy Definition and Value Capture   

The poly-crisis moment that we (hopefully) are all navigating has generated a nearly ubiquitous reset of corporate strategies. According to Gartner, 79% of CEOs will have revisited their business strategy for the post-crisis environment by the end of 2024. These companies are now shifting attention to strategy activation to capture both productivity gains and growth.  

This is a profound pivot and, not surprisingly, teams are struggling to execute at pace. In our work with CEOs beginning in late 2022 and extending to today, we have seen a sharp increase in dissatisfaction with what you could call “value appreciation”. These laments commonly take one of the following forms:     

The Valuation Gap – “Our topline performance is strong, and we’ve built a superior platform. We’re aligned to long-tail secular trends. But analysts are having to work too hard to find that story line.” – Technology CEO 

The Differentiation Gap – “We have a unique collection of assets, especially our software/hardware stack, but no one, including our sales teams, can articulate a distinctive value proposition.” – Industrial CEO  

The Narrative Gap – “Our balance sheet is strong. Our portfolio matches the market. We have talented teams and everyone is working hard. But our corporate narrative is outdated. Everyone has their own version of what’s going on. We need a new, clearer, more inspiring story to rally around.” – Financial Services CEO   

These sentiments and others like them are being expressed by talented executives that have led global teams through multiple crises. They have successfully updated their strategies to meet the moment. Yet today they are also identifying a missing link between strategy articulation and in-market execution. Gaps that have material impact on share price, sales performance and talent economics.  

The Story of Value 

Working with these leaders Prophet has developed a new leadership tool, The Story of Value. At the highest level, the story of value brings the assets of business – both hard and intangible – into a sharp, distinctive and inspiring narrative. It is a story that crystalizes the value that the business creates for shareholders, customers and employees, defining its unique and essential role in the world. It simplifies a complex business into a compelling statement of value – a common language for executives and teams in words that are proven to win in the market.     

Companies are using Stories of Value to pull business strategy forward into various strategy execution workflows, including: 

• Increasing performance of customer marketing and sales effectiveness through sharper value propositions.
• Aligning corporate communications around a distinctive market narrative focused on core value.
• Updating the employee value proposition and modernizing foundational corporate assets (e.g. purpose statements, values, brand positioning) to create a more cohesive culture.
• Arming finance, corporate development and IR teams with stronger investor day and roadshow presentations. 

Writing Your New Story of Value  

Creating an effective Value Story requires going beyond frameworks and workshops. The Story of Value methodology combines a rigorous focus on asset value with market-back insights on value drivers. This data moves through a process that forces clarity and elevates language, culminating in market testing to refine the work and validate its business impact. The end result is both a practical, execution-ready deliverable and a leadership experience that builds cohesiveness and shared belief.  

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It has never been more critical to get post-M&A value creation right. With markets in a state of protracted uncertainty, businesses are more cautious about deploying capital and less patient for concrete returns. M&A activity continues in the pursuit of both revenue and margin growth, but only the most focused operators can achieve each deal’s potential on short timelines and tight budgets. 

We consistently see companies leave value on the table: they fail to reach their goal for value realization, don’t reach it in time, or back away and hedge due to a lack of confidence in the investment thesis. In the end, closing these gaps falls to the business leaders tasked with running the post-deal entity. Here are three key strategies to close those gaps. 

Conversations with business leaders involved in post-M&A activities revealed three crucial yet often overlooked factors—referred to as executional gaps—that executives must address to successfully achieve the value of the deal. 

1. Leaving customer-facing leaders out of the loop 
2. Deals with no value story 
3. Rigid talent models that erode people value (talent and culture) 

For practical and legal reasons, deal teams typically operate with secrecy. This leads to scrambling across the organization when a deal nears announcement. Marketing, communications, and talent teams often become disconnected, resulting in lackluster strategies. This inefficiency puts a time lag on customer-facing decisions and can result in the wrong decisions being made. Brand changes, go-to-market portfolio construction, talent integration plans, and other high-level decisions end up being led by an isolated deal team rather than in partnership with the organization’s functional experts. 

One M&A leader at a large healthcare company said: “Customer value isn’t realized until much later on because it isn’t planned for. [You are already] considering customer [downside risk] in the deal valuation, [why can’t the upside potential] be considered and planned for as well?”    

Recommendation: It’s unnecessary to complicate the M&A process by adding members to the team during due diligence. Instead, build a new step or action within the playbook to pulse out information from the core deal team directly to operating teams when moving toward close. This will help line leaders immerse themselves in the deal thesis and adopt accountability earlier in the process.

Just because deal teams and capital committees understand the value creation thesis; it doesn’t mean that the deal has a value story. Ultimately every audience affected by the deal will need to know how this deal is adding value for them. Yet, internal and external stakeholders often receive very different versions of the story, if they hear anything at all. These fragmented stories don’t always connect, functioning like “point solutions” that speak to the short-term implications for a specific team, rather than amplifying the impact of the deal through a consistent, cohesive narrative that flexes across audiences and still ties back to a single core idea. 

One M&A leader underscored that “the deal story aligns the organization, and it gives them the fuel to change, doing the hard work to realize the value at the core of the deal premise.” This reflects what we’ve seen in market with acquisitions like Danaher’s acquisition of GE Lifesciences. Danaher had a unified plan and story for the acquisition, clearly creating a cohesive message that flows through each key audience. Danaher understood how the entire GE asset – from technology and product portfolio to customer relationships and brand equity – would combine into a powerful new life sciences operating company well before the deal’s close. That plan was then echoed to leaders across the company and into the marketplace. In the end, that cohesive story powered a new operating company, Cytiva, which was central to Danaher’s 110% share performance in the two years following the close of the deal.

Recommendation: Identify an expert, usually from the marketing, brand or communications team, to develop a story of value with the help of a cross-functional team communicating to different audiences. Marketing might personalize the core story for customers while investor relations might develop messaging aligned to what investors are looking for. The communications team might tweak the message for partners and Human Resources might build a North Star narrative for employees. While each message might be slightly customized for the intended audience, each must ladder up to an overarching message to drive alignment and spark value creation. 

While it’s critical to capture value by addressing internal synergies post-close, it’s also important to de-risk the integration plan by recognizing the unique cultural and talent contributions the acquired team brings. The asset likely carries new capabilities, usually with hard-to-hire skill sets which must be thoughtfully redeployed in the post-close entity. Moreover, if it was a successful operation before being acquired, it would have been fueled by a unique culture that needs to be acknowledged, and potentially leveraged as a touchstone for renewal or transformation.  

Several M&A leaders echoed this perspective saying, “If the primary driver of value is something tangible, the culture is overlooked because it is hard to value,” “If you force rigidity on a company, that drives culture mismatch, and it skips over the secondary value question of if the talent and culture could improve your own,” and “If you say ‘hey we love your asset,’ you need to consider the culture and people that created that asset, or you have blinders to the full value of it.” They also spoke to the importance of HR leaning in, as their insights can be critical to understanding what employment shifts will resonate within a company.

Recommendation: Build an employee ignition module into the playbook to build a human-centric strategy for retaining and activating the talent and cultural assets acquired in the deal.

Tech companies have adopted this approach; recognizing the significant value of the talent assets they are acquiring. Apple maintains an acquisition pipeline primarily looking for top talent from the acquired business or redeploy throughout their earn-out tenure. Apple views the acquired talent as a flexible, scalable asset to be used to drive growth well beyond the specific team or company in which they entered the firm. This flexibility not only lowers talent acquisition costs but also serves as a new “Talent Model” lever for value creation, speeding up value realization by applying the strongest talent to the most critical tasks. 

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It’s no surprise that the pandemic has changed the way consumers interact with healthcare. We see it in the proliferation of virtual care across the care continuum, from acute to chronic, episodic and now primary and preventive care. We see it in the embrace of new digital devices and programs designed to monitor chronic conditions at home. And we see it in the uptake of digital pharmacy services that promise ever-faster delivery times and simple, easier, prescription transfers. These shifting consumer need states are forcing companies to action.

Those that will win with consumers in the post-pandemic age are the ones that will accelerate innovation as they reimagine their business models – integrating and re-configuring assets around emergent consumer use cases.

Here are three healthcare business design imperatives for making markets and capturing post-pandemic value through big, bold and transformative moves:

1) Trade the value chain for value exchange

The old news? Payers, providers, pharmaceuticals and MedTech companies once controlled discrete pieces of the value chain. Today, they are operating as collaborators and competitors alongside one another – with non-healthcare entrants (financial services and technology companies) also looking for a piece of the pie.

The new news? “Who does what” doesn’t matter to consumers, instead they value the promise of an integrated approach to health. Whether you build, buy or partner, leaning into the discomfort of superseding the value chain can lead to transformative, new offers. Teladoc Health is a great example of a company that bet big on the idea that virtual primary care is here to stay. It built the Primary360 platform as an entryway to take advantage of its unique portfolio of assets from acute and episodic care (Teladoc Health) to chronic care (Livongo), behavioral health (BetterHelp), and more.

Alternatively, a company that took the partnership route is Cigna. They joined forces with Oscar Health to create an integrated, easily navigable approach to health plans for small businesses. By bringing together Cigna’s provider network and Oscar’s technology platform, they’ve created a relevant solution for the small business population that meets their needs.

2) Meet consumers in the messy middle

If transcending historical value chains is one way to play, another is to exploit the current outages in the value chain and become the middleware that bridges a care gap. Emerging care gaps could include areas like post-acute care, kidney care, pre-and post-Cancer treatment, and health conditions at the intersection of health and wellness (e.g. sleep, behavioral health).

Take recently acquired startup PatientPing, which focuses on the post-acute care space. Through its technology platform, the company can coordinate care by “pinging” healthcare providers when their patients are treated at other facilities. For instance, a provider could be notified in real-time when a patient is transferred from a nursing home to another outpatient setting. Now, with its acquisition by Appriss Health, close to 1 million healthcare professionals across all 50 states can be connected across care settings.

“Those that will win with consumers in the post-pandemic age are the ones that will accelerate innovation as they reimagine their business models.”

In another direction, Alula Health is a startup tackling the “messy middle” of the physical, emotional and financial changes involved with a cancer diagnosis and treatment process. Alula’s platform focuses on patients and their caregivers. They provide organizational tools such as spreadsheets and calendars to ease treatment coordination and a curated list of cancer-specific shopping items (e.g. post-surgery bras and robes with extra room for prostheses or drain management, “Travel to Treatment” bundles with pill organizers, sickness bags, sanitizing wipes, and face masks).

A final example is Talkspace, a platform aimed to make behavioral therapy more accessible. In a world where the dominant method of therapy was administered through expensive 1:1 sessions, Talkspace broke the prevailing mode of thinking and dispensed therapy through bite-sized, text-based interactions – a new modality for meeting the needs of those struggling with mental health challenges discreetly and without confining therapy to a set date/time. In doing so, they normalized therapy for a whole new, addressable market and have since expanded to partner with employers to offer its service as part of workplace benefits.

3) If it doesn’t have their name written on it, it’s not for them

The third hack for making markets through transformation is to address the unmet needs of unique consumer populations. Traditional provider-driven healthcare focuses on triage to identify a treatment path for every patient. But flipping this approach on its head allows for a deeper level of focus, prioritizing time, resources and expenses to solve the needs of one population group more effectively than a general solution.

Segment-specific opportunities are everywhere and can include:

1. Those with a stigmatized condition
2. An underserved population with unique needs
3. An overly generalized population.

A good example of the first opportunity is Ro, self-styled as “the patient company”. Ro started by providing telemedicine and prescriptions for erectile dysfunction via its Roman brand, but gradually expanded to include other medical challenges like smoking cessation (via zero) and weight management (via Plenity). With the technology infrastructure, brand architecture and consumer base established, the company can pursue additional disease states with room for growth.

An example of the second segment-specific opportunity is Included Health, newly acquired by telemedicine provider Grand Rounds / Doctor on Demand. Included Health focuses on the needs of the LGBTQ+ community, who have all too often faced challenges finding culturally competent and affirming providers. The company works with employers to provide benefits to individuals that help them connect to physical care providers, mental care providers, community support and gender-affirming care.

The third-dimension type of play is to identify an overly generalized population – and the field of women’s health is a great example. While some companies have developed “female” healthcare brands, women have different needs by life stage. The spectrum of startups in today’s women’s health space demonstrates different focus areas such as reproductive/sexual health, pregnancy and postpartum, as well as menopause. Within each focus area, individual companies target specific challenges. For example within the category of reproductive/ sexual health, some companies focus on areas such as fertility (Modern Fertility, recently acquired by Ro), cycle tracking (Glow), birth control (Nurx) and more.

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The global M&A market is blazing hot across every major sector. Just look at the headlines announcing a pending deal between Amazon and MGM. And before that, the big news was AT&T’s deal with Discovery Inc. With deal volume rapidly approaching $2 trillion in just the first half of 2021, that’s more deal activity than any corresponding period on record, according to Bloomberg. And there are signs the party is just getting started. With vaccinations trending upward, stimulus flowing in, borrowing costs at record low rates, corporate coffers awash in cash and global economies shifting into a new gear, companies are feeling more bullish about taking big bets on the future.

Many of these recent deals are substantial. The AT&T announcement to merge Warner Media business with Discovery Inc for $43 BN, joins a roster of other major deals such as S&P Global’s $44.5 BN purchase of IHS Markit and Canadian Pacific Railway’s $25 BN purchase of Kansas City Southern. These corporations are rightly looking to acquire new capabilities and access new business models that can help them adapt and grow effectively in a post-Covid world. With M&A deals likely to hit an all-time high in 2021, here are three things business leaders can do to maximize the value of post-pandemic deals:

1. Sharpen the Value Proposition

The pandemic reset customer behaviors and expectations, both globally and across categories. Companies that invested in digital customer engagement and agile operating models were able to pivot in order to address rapidly shifting customer needs and new, often virtual use cases. As the world emerges from lockdown, the needs and behaviors during the pandemic will combine with pre-pandemic use cases to shift market requirements, once again, into post-pandemic need states.

Shifting customer needs demand refreshed value propositions, which accelerating M&A activity seeks to address. Smart players will use M&A to not only acquire capabilities required to compete in post-pandemic markets but will push their organizations to refresh their comprehensive value proposition including – product, service promise, customer experience and branding.

Example: When Danaher acquired the life sciences assets of GE Health, it retooled the value proposition of that business. In creating a new operating company called Cytiva, Danaher brought a sharpened, stronger value proposition to its biopharma and research customers through a comprehensive product portfolio that dramatically and demonstrably accelerates the discovery-to-development-to production lifecycle of biopharmaceuticals.

2. Expand the Revenue Platform

Platform businesses have attractive revenue dynamics — cross-selling and customer penetration, low customer acquisition costs, the ability to extract first-party customer data and switching barriers that get higher as customers go deeper into the platform. Smart M&A uses acquisitions to not only acquire new capabilities, solutions or customers, it also actively adds and recombines to strengthen platform dynamics.

Example: When Cigna purchased Express Scripts (the largest single deal in 2018), it acquired ESI’s significant PBM and pharmacy assets. Last year, Cigna combined the ESI business with several legacy Cigna capabilities to create Evernorth, a robust health services platform with significant data assets. In combining and reconfiguring assets into Evernorth, Cigna is driving platform revenue dynamics through data-enabled solutions that draw from capabilities across the platform, and drive higher clinical outcomes while lowering costs, what the company calls “the value of integration.”

3. Clarify Purpose for Employees and Customers

Big deals can ratchet up expectations externally and raise anxiety internally. Post-Covid deals are likely to have an even more unsettling effect on the employees needed to power deal success. Office workers have endured a roller coaster year of change. After adapting to work from home, they face another round of seismic changes as re-entry begins and companies call them back into the office. Priorities for these workers have shifted during the pandemic and so has their status quo. Time with family is more precious, commuting is optional and office culture has gone online.

So, when asking employees to undertake a post-merger integration, there better be something meaningful to come back for. Companies undergoing a mega-merger should use this moment to clarify their purpose to the market and to employees. A 2019 Cone/Porter Novelli study found that purpose can drive real business impact, with 86% of respondents claiming that they were more likely to purchase purpose-driven brands and 79% claiming to be more loyal over time. Purpose also drives higher rates of retention, productivity and happiness at work among employees according to a 2017 Great Places to Work study.

Example: When CVS merged with Aetna, the newly combined entity promised to create a new data-driven healthcare model that’s more personal, more convenient and more tailored to individual patients than ever before. They’ve since continued to make good on their purpose to help people on their path to better health by creating a rolling thunder of moves aligned to their purpose and setting clear ESG targets for 2030 and holding themselves to account. Since the deal was announced in 2017 and closed in 2018, CVS Health has shown steady year-over-year revenue growth.

“These corporations are rightly looking to acquire new capabilities and access new business models that can help them adapt and grow effectively in a post-Covid world.”

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Amazon just announced its online pharmacy, news the healthcare world has long expected. And while much will be said about what Amazon Pharmacy means for the $1.2 trillion prescription drug business, we believe there’s something even bigger going on here. And it offers lessons to every company seeking growth in the post-COVID-19 world.

Amazon is proving once again that digital transformation isn’t just about technology. It’s about moving at “the speed of digital” and giving customers what they need. The e-commerce giant is merely acting on a template for growth that works in every industry and for every brand: When people begin to start moving through their lives differently, it creates upheaval, revealing new pockets of need. And the space between these changed behaviors offers abundant growth opportunities for every business willing to study them closely and act. We call these pockets of new opportunity behavioral white spaces.

Amazon’s timing offers an important lesson. This move has been brewing for years, even before its acquisition of PillPack in 2018. The company’s value proposition–getting people what they need, fast–made pharmacy an obvious extension. Who wouldn’t like to get routine prescriptions filled online, as quickly and seamlessly as every other Amazon Prime purchase?

But while it had been laying the groundwork for years, COVID-19 changed the way the world views healthcare. Consumers have always been eager for digital solutions to staying healthy and making their lives more convenient. The pandemic is clarifying, crystallizing and augmenting these new preferences, creating the perfect moment for Amazon’s launch.

Assessing the new playing field

Growth strategists should look beyond the inevitable “Amazon set to crush yet another industry” headlines. First, we are not sure it will prove to be true. Secondly, the news is more significant than that, highlighting an equal-opportunity growth moment. While there are multiple moves available, the best choices will differ depending on each company’s purpose and value proposition. Amazon is just following the universal rules of innovation and customer-centricity: What are the new customer needs, and how can we meet them in new and better ways?

There are many ways to win within today’s environment. Other companies have capitalized on the need for home care and the benefits and convenience of home delivery. Take Express Scripts Pharmacy as an example which relaunched its enhanced digital experience and consumer-centric brand earlier this summer. Unlike Amazon or new entrants in the pharmacy space, they’re building upon their deep clinical expertise, legacy in practicing pharmacy, ease and convenience of home delivery, coupled with 24/7 access to specially trained pharmacists.

“The space between these changed behaviors offers abundant growth opportunities for every business willing to study them closely and act.”

Express Scripts Pharmacy used key insights to understand that for many consumers, particularly those with multiple chronic conditions, pharmacist expertise matters more than convenience. And it’s worth pointing out that Americans have enormous trust and respect for their pharmacists, with Gallup reporting they are just behind nurses and doctors.

That’s just two players attacking the space from two different angles. There are certainly many other moves still available.

One way to analyze potential growth moves is to think about three different roles organizations can play as consumers continue to speed through these rapid changes in both needs and expectations. We like to use the “transformers, creators and invaders” framework when thinking about industry disruption. Healthcare provides some stellar examples.

Express Scripts Pharmacy is a transformer. It’s an example of a company reinventing itself and its offerings, using experience-first initiatives to reach its customers in new–and better–ways. Companies, like Teladoc, Oscar and Higi, are creators. And then there are invaders, like Amazon, moving from one category to another.

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For the right investors, the rapidly shifting direct-to-consumer (DTC) landscape presents plenty of possibilities. Many of these digital natives are just one cash infusion away from dominating their category–as long as they make the right strategic DTC growth moves.

“We find companies that have the potential for market disruptive growth and profitability, and the positioning to generate the most likely–and fastest–returns on investment.”

The pandemic-fueled surge in all things e-commerce is pushing many to record sales, with business booming at companies like Peloton, Quip and HelloFresh. But not all DTC companies have the same growth potential, and there have been plenty of notable flame-outs. In our work for funds looking to make DTC investments, whether it’s in due diligence or consulting on the use of funds post-transaction, we’re intent on optimizing investment. We find companies that have the potential for market disruptive growth and profitability, and the positioning to generate the most likely–and fastest–returns on investment.

Beyond assessing fundamentals, including how well possible targets have penetrated their customer base, brand staying power and competitive moats, we zero in on potential, based on specific growth moves. We’ve seen that companies with the ability to lean into these five strategies have the best chance to achieve uncommon growth.

We look for companies that are ….

1. Continually Tapping Unmet Needs

The most successful DTC brands started with an unmet need, filling some area of behavioral white space. Millennials, for example, wanted to start investing but felt ignored. Companies like E-Trade and Charles Schwab seemed like their parents’ tools. Robinhood, with its “investing for everyone” credo, stepped in to draw millions of new stock-market investors, with impressive (and occasionally controversial) results.

Lemonade

Our favorite example is Lemonade, which has used behavioral nudges and machine thinking to become the most disruptive force in homeowners, renters, condo and now pet insurance. In return for signing the honesty pledge, customers get transparent prices and lightning-fast service. While many Gen X and older customers may not have heard of it, young people love it. “I just bought insurance on Lemonade,” one of my young associates told me the other day. “And the user experience was freaking awesome.” Has anyone ever said that about insurance until Lemonade came along?

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2. Ending Churn Through Customer Obsession

Given the massive spending needed to acquire customers, the strongest brands are those that maximize that investment. Strong retention requires a shift in focus from product obsession (the natural starting point for so many DTC companies) to true customer obsession.

Stitch Fix

Stitch Fix is continually updating its offer, finding new ways to please existing customers and new customers to please. Its core offer is a fashion fix with five carefully curated choices, and millions love how the personalization gets more accurate over time. But many don’t want to shop this way. So it recently introduced Direct Buy, enabling old and new customers to dive deep into single categories, boosting incremental sales.

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3. Uncovering Value Through Deep Customer Analytics

The fastest-growing companies are those that do the most with their data.

Looking closely at questions of price elasticity, for example, can make all the difference in expansion, particularly in new territories. And while this has long been the promise of DTC companies, the reality is that the more data they collect, the less likely they are to use it. IDC estimates that about 90% of what businesses collect is “dark data,” and never used at all–let alone effectively.

Canoo

So we pay close attention to those that dig into data in every channel. Canoo, for example, is so expert at harnessing tech and innovation insights that it’s poised to launch its electric vehicles after 19 months, not five years. And based on analytics, it’s confident that higher-end consumers will love its subscription-only model, with as little as a one-month commitment.

MeUndies

Another data-savvy company is MeUndies, which has used what it’s learned from social media to sell more than 10 million pairs of underpants. Even rarer for DTC companies, it’s been profitable for three years.

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4. Finding New Adjacencies

While many DTC brands build their business on a single product, they eventually need to expand to keep growing, either geographically or by adding new categories. This is a moment when many need more cash, new investors or the ability to acquire or partner with other companies.

Casper

Broadening offers while maintaining category credibility often comes down to the right messaging and positioning. Casper, for example, launched in 2014 and quickly became successful. But as competitors piled on, it’s needed to find new ways to expand. With a promise to become “the Nike of sleep,” it now sells pillows, sheets and weighted blankets. But more importantly, it positions itself as the expert on sleep wellness.

Airbnb

Similarly, Airbnb recognized that it could find growth by moving beyond lodging and selling experiences that make people want to travel. From sushi tours of downtown Tokyo to paddleboarding with sea lions, these adventures are adding millions in revenue. (When COVID-19 struck, they also provided a quick pivot to virtual experiences.)

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5. Partnering Strategically to Scale the Ecosystem

Headspace and Spotify

Finding partners is a way to access new customers and stay relevant. Headspace, the popular meditation app, has increased its influence exponentially by partnering with Nike, Spotify and the NBA.

Everlane and Nordstrom

Retail is an obvious choice and can be a game-changer. Even non-digital consumers can discover brands like Native, Harry’s, Barkbox and Quip at Target, for instance, or find Everlane and Birdies at Nordstrom.

Alo and Animal Crossing

Others leverage pop culture. Alo, a yoga company, and Tatcha Beauty teamed up with Animal Crossing for product launches within the popular video game.

Allbirds and Adidas

The partnerships that we believe spark the most growth are those that combine scale and purpose. Allbirds, which has built its impressive valuation on sustainable fashion sneakers, recently partnered with Adidas, which has been trying to increase visibility for sustainability efforts. Interestingly, this unlikely partnership with competitive brands introduced a collaboration that pairs Allbirds’ innovative approach to materials with Adidas’ marketing and manufacturing might, and is set to produce the world’s first carbon-neutral performance shoe next year.

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After several quarters of near-frenzy pace, global deal-making is starting to slow. But for those in charge of managing portfolio and architecture strategy, the recent mergers and acquisition binge is creating something of a mess.

Many of the decisions about customers, brands and marketing have been addressed too quickly as deals were coming together. And once the integration process starts, those initial plans unravel. As the financial and operations teams that finalized deals hand them off to those responsible for taking new assets to market, tangles of false assumptions and the sub-optimal use of brand assets emerge; the value creation logic of the deal never gets out of the spreadsheet. And with $1.24 trillion in deals already on the books this year, that confusion presents material risk for shareholders.

Increasingly, clients are coming to us for help figuring out the best ways to organize and manage new, post-deal asset bases. Often, they start by asking: “Should we be a house of brands? Or a branded house?”

“Should we be a house of brands? Or a branded house?”

We’re not afraid to say that’s simply the wrong question. Digitally-focused companies can’t afford to think that way. The modern approach to architecture and portfolio strategy, and the one inherently chosen by digital natives, is radical flexibility.

Older companies are coming to understand this, too, focusing on customers earlier in the M&A process, aware that integration management offices are often working with incomplete data.

In order to get this right and maximize the value of today’s deals, we believe the best post-merger decisions come down to answering three essential questions.

Three Essential Questions For the Best M&A Portfolio Strategy

1. Are we customer-obsessed?

Our research on brand relevance offers compelling evidence that companies that are obsessed with customers significantly outperform others. It’s no surprise that the names that dominate the top of the Prophet Brand Relevance Index® are digital-first, including Apple, Amazon and Netflix. And those at the top of the list consistently outperformed the S&P 500 by 3x in revenue and 205x in profit in the last decade. These companies constantly ask themselves: Are we putting customer-use cases and environments first? All decisions are filtered through the perspective of customers and prospects.

When considering customers first—the buyers, the deciders–it’s easy to see how easily a company like Procter & Gamble and Schick might be outflanked. Direct-to-consumer brands like Dollar Shave Club and Harry’s have devoted themselves to changing and improving the razor shopping experience, rather than focusing on promotions and product features.

In post-M&A environments, brand portfolios should be built around key customer use cases, balancing the desire for efficiency with a customer-centric model that leverages the strongest brand for each use case. When J.P. Morgan & Co. and The Chase Manhattan Bank merged, they prioritized efficiency over customers and created a brand mash-up that weakened both brands. After a couple of years of brand value degradation, a new strategy that led with customer needs was founded with a powerful institutional brand, J.P. Morgan, and a powerful retail brand, Chase. This approach allows for effective targeting of clearly defined customer segments with separate brands and tailored offerings, and is paying off for JPMorgan Chase, with a five-year gain in brand value of 53%.

2. Can we find max value?

When M&A deals fail to generate revenue synergies, there is usually a lack of early focus on customer, marketing and branding issues. Playbooks often don’t include these steps and when they do, the discussions are qualitative and overly reliant on opinion and emotion.

The solution is in this key question: Are we deploying our assets to maximize customer use cases?

Companies can find significant incremental deal value when they integrate customer and marketing analytics in pre-close analysis and the integration management office. We studied one deal that doubled the final price of a $5 billion global asset by modeling the financial impact of future (post close) brand use cases. Another estimated market-share gains between 2 and 3% on a $60 billion deal through brand portfolio economic analysis. And on the cost side, we are helping companies lower post-merger migration costs between 15 and 40% by using cost-optimization analysis.

3. Are we serving up the right offer?

The best way to achieve this optimization is to constantly elevate the right offer for each person, on the right device and at the perfect time. Companies like Google, Amazon, Facebook and SAP are experts at this kind of hyper-responsiveness, with nearly-infinite capabilities for personalization, depending on the needs of each customer. They continually ask: Do we have an adaptive brand architecture? To win with today’s digitally demanding customers, companies need to maximize all the flexibility available through digital tools, making sure offers are as adaptive and individualized as possible.

Amazon remains a perfect example. Rather than being a monolithic Amazon or a fragmented collection of sub-brands, the brand adapts to its audience, use case or environment. Do you listen to a book at 9 p.m. each night? If so, it’s likely Amazon will push an Audible brand message just before. Recently ordered paper towels? Alexa will check-in to see if you need a refill. Context is king in our world, and successful companies will deliver an adaptive architecture that ensures maximum relevance.

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You Acquired a Shiny, New Technology Company, Now What?

Mergers and acquisitions help many organizations accelerate digital transformation through the acquisition of new products/services, technology, processes or talent. For example, McDonald’s recently acquired the machine learning start-up Dynamic Yield for $300M to scale their use of machine learning technology and improve the customer experience.

While there is nothing new about large corporations acquiring small specialist products or capabilities; these “digital M&A” deals are often different because:

1. The acquirer is typically a more traditional business
2. It’s not a “mega” deal, but more likely a small acquisition of a start-up or growth stage firm with an enterprise value of few hundred-million dollars
3. The motivation isn’t always about the products or capability but about the brand, culture, ways of working, processes and experiences
4. The acquisition is being used as a vehicle to accelerate business transformations, though has little in common with the acquirer

The target acquisition company is likely to be less than 10 years old and has “grown up” in the digital age. Its business model, processes and structure are much more likely to look like a “lean startup” business and has never operated outside those principles (e.g., customer-focused, data-driven, empowered decision making, rapid/iterative product development and innovation).

Typical Integration Approaches Will Prevent Maximum Value Capture

The traditional approach to M&A, with its focus on integration and synergies, was designed to extract value from an acquisition, not to enable the transformation of the acquirer (by the digital characteristics or products of the target company). The traditional “victor” approach risks damaging three of the most valuable aspects of digital acquisition: people, customers and growth.

People

The employees of targeted small technology firms have been part of a rapidly growing start-up company with a distinct culture and ways of working. They are committed to the culture and company, and proud of what they have accomplished. Yet, after an acquisition, only 36 percent of founders expect to stay at their company (CBInsights, 2019) and 33 percent of employees will have left within a year (Kim, 2018). This attrition is value destructive in two ways:

1. These employees are the talent who created, and knew how to operate the value, that was acquired in the company.
2. The people are often the types of new thinkers and cultural change agents that are key to helping the acquirer pivot into a more digitally-enabled organization.

Describing these differences simply as a culture fit issue understates the challenge. These differences are deeply embedded in processes, organization and behaviors – even technology choices (pretty much the whole business model). A rapid flight immediately caps the value creation potential of the deal by stunting the acquirer’s ability to learn from and be more thoroughly transformed by the new, digitally-centered team.

Customers

The merger or acquisition will undoubtedly result in changes to the customer experience. Sometimes these changes can seem relatively trivial (minor billing changes or web page navigation) while others are more significant (new pricing structures or sales relationships). Big or small, changes in customer experience are magnified in the context of digital acquisitions.

“The traditional “victor” approach risks damaging three of the most valuable aspects of digital acquisition: people, customers and growth.”

These companies have been built from the market back, products of fierce customer obsession and rapid, often daily (or even hourly) updates to products or service experiences. Even the slightest variation, like slowing the release of new updates or adding a new approval layer, can reverberate negatively with customers that have come to expect a more frictionless experience.

If not managed carefully, changes that impact customer experience can cause customers to look for alternatives, taking with them not only revenue but the types of engagement, feedback and insight that are components to driving broader digital transformation.

Growth

When working on “digital” mergers and acquisitions, we find that the primary driver is to drive significant growth. This is atypical to most M&As which tend to be focused on finding cost synergies.

As a result, the post-merger integration that is applied to the acquisition is biased heavily towards the identification and realization of cost synergies in technology, finance and operations. This “traditional” integration methodology was never designed to drive growth, and it certainly was not designed to consider brand, customers and a digital operating model.

Four Integration Actions to Create Value and Ignite Business Transformation

To maximize the full value of your next small digital/technology acquisition, make sure your integration process preserves, and is ultimately transformed by, the full assets of the firm – it’s people, customer relationships and operating models. There are four integration actions that will help you preserve these assets:

Consider Brand and Customer Experience Early and Often

Ensure all functional discussions include conversations around customer impact and set the precedent that customer impact and experience is a priority. Assess how the integration is impacting your customer experience in terms of disruption and potential opportunity from initial deal planning through to deal close. You should leverage your existing customer journey maps to assess the potential impact. Consider creating a standard set of journeys that you can show side by side between yours and the acquired company’s customer journey to define a future consolidated journey.

After the deal close, you may want to discuss details of the acquisition with your largest and most strategically important customers (particularly the key customer of the acquired firm). For your own customers, this provides a great opportunity to discuss what it could mean for them and how they could benefit from the new products or capabilities.

Broaden Your Culture Assessments

Standard culture assessments help businesses understand the broader cultural and ways of working differences between the two organizations, but rarely provide enough insight into how the cultural differences will impact the ways of working. Nor do they place an emphasis on what the acquirer can or should do for the acquired business. You should broaden your culture assessments to identify key processes where digital capabilities are likely to have a high impact such as product development, experience, marketing and sales.

Quickly Integrate New Talent

The most effective ways to integrate the new organization and accelerate your digital journey is to quickly include talent from the acquired digital organization. You can do this in two ways:

1. Look for individuals who you could move into your existing digital transformation program or team.
2. Place one of the digital founders into a leadership role within your organization where they will be a significant stakeholder for your digital transformation activities.

You will need to reshape incentives and governance across the enterprise to meet and support the expectations of your new digital-first talent and start to change the behavior of your existing talent. In addition, you will need to help reskill your existing workforce so they can play well with their new digital native colleagues.

Shake Up or Test New Operating Models

Acquiring a new company provides an opportunity to shake up your existing operating model. Examine a few areas of the operating model where characteristics of the acquired business might help you move toward a more evolved digital enterprise. For example:

• Governance: Does the acquired business have greater delegation in decision making which could help improve agility in certain more innovation driven functions?
• Product: Is their product development process using customer feedback more effectively to drive higher customer satisfaction?
• Measurement: Are their KPIs more consistent with digital products, and therefore driving improved performance?
• Service: Do they have a stronger service and customer first culture which improved customer retention and loyalty?
• Data: Are decision-making processes based on data or more effective?

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When you hear the word “tagline” what comes to mind?

Perhaps “Where’s the beef?” “I’m loving it,” “Think different,” or “Just Do It.” These are unforgettable, timeless classics. But most of the taglines people remember are just that—classic and old. Where are the new classics?

Lately, taglines have fallen out of favor, and much has been written questioning their value. In this article, we’ll explain what’s really going on with taglines and why they still might matter for your business.

Where Did Taglines Go?

In the past, considerable focus was placed on taglines. They were often evaluated and scrutinized with the same rigor and energy we now reserve for new product launches and acquisitions.

Today, taglines are less critical. The power and effectiveness of advertising-centric marketing have been replaced by more personal brand engagement. In many cases, customers are simply not influenced by a short, static statement attached to a logo or used as a sign-off in an ad. Instead, customers are motivated by compelling, timely offers and intuitive experiences that demonstrate a brand’s relevance to their lives.

Considering the cost of taglines

Tactically, taglines can create layers of complexity and cost. They need to be locked up with logos and translated for different markets—all while fitting into the hierarchy, both strategic and visual, with headlines and product messaging, creating significant work for brand managers.

Despite these changes and challenges, a tagline can still deliver unique value. A compelling verbal shorthand can convey the same meaning as a 60-second advertisement or a six-paragraph About Us section, capturing attention and moving audiences to a specific thought or action. In short, there is still undeniable magic to getting the words just right.

Four Purposes a Brand Tagline Can Accomplish

With this perspective, we’ve identified four scenarios when an organization should consider using a tagline—either introducing one or changing an existing line—and the questions they should answer along the way.

1. To showcase your reason for being

More and more, employees want to work for an organization with a strong sense of purpose and a values system that reflects their own. Meanwhile, customers are increasingly interested in understanding the character, purpose, culture and business practices of the organization behind the brand.

A tagline can be an effective tool to speak directly to an organization’s employees and speak to the world on employees’ behalf.

In this way, a tagline reveals a deeper insight about the company, its people, how they work and what they value. Siemen’s “Ingenuity for Life” and TransUnion’s “Information for Good” are examples of this type of tagline at work. They don’t necessarily describe the organization’s value proposition, but rather seek to tell a more emotional story about who the company is and why it matters in the world.

Questions to consider:

• Do you need to inspire and re-energize your people and teams around a core idea?
• Do you believe that customers do not fully understand your purpose?
• Can you create greater value by engaging stakeholders (employees, investors, customers, influencers, communities) in a shared purpose?

2. To reposition your company

A brand tagline can effectively help organizations reframe what customers believe about them and enhance their overall value proposition. For GE, “Imagination at work,” helped to elevate the brand’s innovation profile and created a sense of whimsical curiosity, which was echoed in advertising. For McDonald’s, “I’m lovin’ it” shifted the fast-food chain’s story from convenience to enjoyment, and paved the way for the more ingredient-focused stories that followed.

It’s important to be substantive when repositioning. As these examples illustrate, successful taglines must be part of a larger marketing or branding investment. Cosmetic communication, which includes taglines, can frustrate or alienate customers if real change is not evident in the brand’s experiences.

Questions to consider:

• Do you need to reshape perceptions of your brand?
• Are you struggling to clarify how you are different from competitors?
• Are you finding customers are uninformed about your full value proposition?

3. To create a whole new category:

In the start-up world where organizations are creating entirely new value propositions and business models, a tagline can help the brand introduce itself clearly and effectively.

In 1998, eBay introduced the descriptive tagline “Your personal trading community.” In 2001, it was replaced with the more aspirational “The world’s online marketplace,” and in 2007, it was replaced again with the much more suggestive “Shop victoriously.” Over time, eBay no longer needed to educate the market and could instead focus on making an emotional connection.

“Customers are motivated by compelling, timely offers and intuitive experiences that demonstrate a brand’s relevance to their lives.”

Brands still deploy this tact today. Dollar Shave Club’s “Shave time. Shave money” not only articulates the brand’s core value proposition, but also hints at the brand’s sense of humor in a “more blades is better” market.

Tactically, these kinds of taglines work well at launch, and as eBay illustrates, they can be used more sparingly or replaced when market education is no longer needed.

Questions to consider:

• Are you introducing a new service or business model that might need additional explanation or context?
• Do you have limited resources for articulating what you offer to customers, where a tagline that travels with the name would do heavy lifting?

4. To stand out and inspire loyalty:

In markets with high levels of competition, price-conscious customers and intense marketing activity such as telecom, automotive, food and beverage and CPG taglines can support awareness, memorability and recall.

In these cases, brands use taglines to cut through dense communication environments and create a more emotional, memorable connection. Examples of this approach are BMW’s “Freude am Fahren” or “The ultimate driving machine,” Carlsberg’s “That calls for a Carlsberg,” and Nike’s “Just Do It.”

These taglines do little work to articulate the brand’s value proposition or core differentiators. Instead, they appeal to consumers’ emotional nature to drive loyalty to the brand.

Questions to consider:

• Do customers make decisions about your products in a high-volume communications environment?
• Is your category fast-moving, with apparent parity among competitive products?
• Do you rely on broadcast marketing and advertising as a major tool for connecting with customers?

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2015 and 2016 were record years for mergers and acquisitions, and 2017 appears to be more of the same. According to MergerMarket, H1 recorded an 8.4% increase in deal value globally, compared to the previous period. 17 mega-deals equating to more than $10B have already been announced in 2017 – including Amazon/WholeFoods, Essilor/Luxotica and Mars/VCA. And with PE raising record buy-out funds, and several massive deals announced in 2016 that have yet to close – see AT&T and Time Warner or Qualcom and NXP – M&A will remain at the top of the agenda as the search for growth continues.

But will all these deals payout?

It’s not entirely clear that they will. M&A has an inconsistent record. Mega-deals tend to underperform while other M&A strategies appear to fare much better. Last year HBR challenged the industry, stating that M&As are a “mug’s game” with 70-90% of acquisitions ending up as “abysmal failures.” Despite the debate, M&A deals, especially for larger organizations, will continue. The prospects for organic growth are simply too low and the competitive risk of not moving is too high.

How to Build a Successful M&A Strategy

M&A transactions are modeled against a value creation logic: the economic theory for how a new combination of assets will create shareholder value through superior use of funds. The larger the deal, the harder it is for this logic to play out.

Mega-deal success demands that multiple strategic and operational assumptions of staggering size and complexity fall into place. Future market dynamics must play out as envisioned. Large employee populations and cultures have to mesh. Cost-savings schemes requiring intense operational discipline must be driven to completion in a marathon of sprints. Throw in systems integration, customer defection risk, key talent discounts and the occasional black swan event and the checkered history of mega-deal M&A becomes more understandable. But not inevitable.

3 M&A Strategies to Drive Mega-Deal Success

Drawing from decades of experience helping executives through M&A integrations, we have identified a blueprint for managing downside risk and accelerating growth.

From that blueprint, here are three plays to run at the beginning of the M&A process to maximize the possibility of success:

1. Model Marketing and Branding Decisions Before You Make Them

After the deal is signed and bankers clear the room, the hard work of realizing new value begins. Typically, this involves dozens of parallel initiatives including system integration, organizational restructuring, expense rationalization and branding/customer experience workstreams. These projects are bundled into a broader integration plan, coordinated through a PMO and funded from tax-advantaged integration budgets. Curiously, while essential to the post-close success of the deal, the marketing/branding workstream is often not managed with the rigor of other integration initiatives.

We frequently observe teams passing on high-potential strategies either because of a lack of analytical rigor or a failure of strategic focus. Often, companies do not recognize the power of available financial and risk modeling tools to support marketing and branding decisions. Additionally, because these techniques are often less familiar to marketing leadership, their insights can fail to sufficiently influence internal decision-making.

Case in point: Recently, a large multinational made a transformative acquisition (>$10B) that extended its reach into an adjacent category. Using an econometric model based on-demand analytics, we estimated the potential market share increase of several new brand and product architecture scenarios. In the leading scenario, the model estimated a multiple-point increase in share on the acquired company’s base business. Unfortunately, that scenario never made it to market as executives selected a suboptimal strategy based on pre-merger working assumptions.

The same holds on the cost side. Post-deal integration of a marketing system will demand significant resources of capital and time. The data is available to model scenarios that remove cost and process layers, while optimizing the capital deployed. The tools and capabilities are available but too few, we find, take advantage.

The lesson: the marketing and branding moves that could tilt the balance of power in your favor require:

1. Decisions based on analytical precision
2. The leadership wherewithal to make them

 2. Operationalize the Value Creation Logic Into a Plan to Win

Execution creates new value, not strategy. Almost all mega-deal structures rely on often aggressive cost-savings assumptions. They are central to securing financing or shareholder approvals. However, this focus on cost-take-outs and backend integration often distracts leadership from building actions plans that bring the new assets of the post-deal firm directly to customers.

“How does this deal actually create value for your customers?”

A few years ago, we were working with the CEO and executive committee of a Fortune 200 financial services player. The company had nearly doubled in size through a mega-deal that combined banking and asset management into a single entity and brand. The firm was tracking on its multi-year cost reduction plan but wasn’t gaining traction with clients. During a working session with the executive team, it occurred to us that the combined company had never articulated new customer (or employee) value propositions. At one point, we asked the straightforward question: “How does this deal actually create value for your customers?”. The absence of an answer from leadership was startling. A year later, an activist investor was in the boardroom and the CEO was out amid calls for a breakup.

The value creation logic will vary from firm to firm. For deals of significant size, the logic always features significant cost savings components (scales economies, tax inversion strategies, etc.). But M&As also present an opportunity for firms to significantly increase the value of their products and services to customers. Smart deal-makers realize this top-line advantage by building a plan to win that operationalizes the value creation logic. These plans will include an expanded customer value proposition, updated strategies for key accounts, product enhancements and an expanded client servicing model that uses data and UX to enrich the customer experience, among other moves.

When Microsoft announced its acquisition of LinkedIn at $26B – the largest in the company’s history – they immediately articulated a new customer value proposition for the combined firms. Their investor presentation laid out realistic product use cases that showed how customers will benefit when Microsoft software is embedded into LinkedIn’s platform and UX.

Investors care about the cost base; customers don’t. In the M&A context, customer sentiment is clear: “I’m happy for you to bring new value to the table. Just don’t change my team”. Companies that operationalize the deal logic into a value-add for customers will simply create shareholder value faster than those that don’t.

3. Build a Culture That Keeps Faith With the Deal

Beyond the models and strategies, the deal’s value will ultimately be secured or forfeited through the actions of employees. Irrespective of the size of the deal, retaining talent, focusing teams and nurturing cultures is the most challenging M&A leadership task. It simply gets harder for mega-deals.

Success requires that the talent levers of the organization line up with value creation logic, which my colleague Helen Rosethorn in her seminal book calls “keeping faith with the deal”. This often includes reorganizing operating units around new capabilities, recoding sales scripts and customer engagement models, and reengineering operations. Heavy lifts, for sure. But tending to culture is probably harder and more important.

Nothing grinds post-M&A value creation to a halt like resistant culture. Mega-deals create change and ambiguity for large employee bases. The M&A stimulates the free-market dynamics among employees – basically, they become open to considering other deals. It occasions big questions like “How does my world change?”, “Am I still valuable?” and “What’s it in for me?”. Change is difficult to process at a human level; ambiguity is always interpreted negatively. To unlock the full value of the deal, leaders must frame the big move in the context of a deeper purpose for the organization, strengthening the employee value proposition by focusing not just on the “what,” but on the “so what?”

Satya Nadella was clear about how the LinkedIn acquisition fit into his broader goal of reanimating Microsoft’s purpose. Similarly, when Roche acquired Genentech, it ring-fenced the biotech’s vaunted talent and culture by retaining its identity and independence. Others have not been as successful.

When Xerox bought ACS, its largest acquisition ever, it correctly foresaw the need to swim upstream into higher-margin services. But the deal logic never panned out. Revenues failed to reach targets and the market cap had fallen 37% by the time CEO Ursula Burns capitulated to investors and abandon the vision, spinning out the old ACS business off in a stand-alone services play. While Xerox found some cost synergies, people and processes never coalesced around a shared purpose worth fighting for.

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